Otis Worldwide 10-Q 2022-03-31

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

OR

☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-39221

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OTIS WORLDWIDE CORPORATION

(Exact name of registrant as specified in its charter)

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Delaware						83-3789412
(State or other jurisdiction of incorporation)						(I.R.S. Employer Identification No.)

One Carrier Place, Farmington, Connecticut 06032

(Address of principal executive offices, including zip code)

(860) 674-3000

(Registrant's telephone number, including area code)

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Securities registered pursuant to Section 12(b) of the Act:

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock ($0.01 par value)			OTIS			New York Stock Exchange
0.000% Notes due 2023			OTIS/23			New York Stock Exchange
0.318% Notes due 2026			OTIS/26			New York Stock Exchange
0.934% Notes due 2031			OTIS/31			New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý. No ¨.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý. No ¨.

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer			ý			Accelerated Filer			¨
Non-accelerated Filer			¨			Smaller Reporting Company			☐
						Emerging Growth Company			☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐. No ý.

At April 15, 2022 there were 422,794,427 shares of Common Stock outstanding.

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OTIS WORLDWIDE CORPORATION

CONTENTS OF QUARTERLY REPORT ON FORM 10-Q

Quarter Ended March 31, 2022

			Page
PART I – FINANCIAL INFORMATION			4
Item 1. Unaudited Financial Statements:			4
Condensed Consolidated Statements of Operations for the quarters ended March 31, 2022 and 2021			4
Condensed Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2022 and 2021			5
Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021			6
Condensed Consolidated Statements of Changes in Equity for the quarters ended March 31, 2022 and 2021			7
Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 2022 and 2021			8
Notes to Condensed Consolidated Financial Statements			9
Report of Independent Registered Public Accounting Firm			25
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			38
PART II – OTHER INFORMATION			41
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 6. Exhibits			42
SIGNATURES			43

Otis Worldwide Corporation's and its subsidiaries' names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or tradenames of Otis Worldwide Corporation and its subsidiaries. Names, abbreviations of names, logos, and products and service designators of other companies are either the registered or unregistered trademarks or tradenames of their respective owners. As used herein, the terms "we", "us", "our", "the Company" or "Otis", unless the context otherwise requires, mean Otis Worldwide Corporation and its subsidiaries. References to Internet websites in this Form 10-Q are provided for convenience only. Information available through these websites is not incorporated by reference into this Form 10-Q.

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PART I – FINANCIAL INFORMATION

OTIS WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

						Quarter Ended March 31,
(amounts in millions, except per share amounts)						2022						2021
Net sales:
Product sales						$	1,422					$	1,458
Service sales						1,992						1,950
						3,414						3,408
Costs and expenses:
Cost of products sold						1,190						1,187
Cost of services sold						1,218						1,202
Research and development						37						35
Selling, general and administrative						459						482
						2,904						2,906
Other income (expense), net						16						7
Operating profit						526						509
Non-service pension cost (benefit)						—						2
Interest expense (income), net						37						32
Net income before income taxes						489						475
Income tax expense						136						123
Net income						353						352
Less: Noncontrolling interest in subsidiaries' earnings						42						44
Net income attributable to Otis Worldwide Corporation						$	311					$	308
Earnings per share (Note 2):
Basic						$	0.73					$	0.71
Diluted						$	0.73					$	0.71
Weighted average number of shares outstanding
Basic shares						424.2						431.6
Diluted shares						427.7						433.7

See accompanying Notes to Condensed Consolidated Financial Statements.

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OTIS WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

						Quarter Ended March 31,
(dollars in millions)						2022						2021
Net income						$	353					$	352
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments						—						(22)
Pension and postretirement benefit plan adjustments						2						4
Change in unrealized cash flow hedging						—						(4)
Other comprehensive income (loss), net of tax						2						(22)
Comprehensive income (loss), net of tax						355						330
Less: Comprehensive (income) loss attributable to noncontrolling interest						23						(30)
Comprehensive income attributable to Otis Worldwide Corporation						$	378					$	300

See accompanying Notes to Condensed Consolidated Financial Statements.

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OTIS WORLDWIDE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollars in millions)						March 31, 2022						December 31, 2021
Assets
Cash and cash equivalents						$	1,235					$	1,565
Restricted cash						1,841						1,910
Accounts receivable (net of allowance for expected credit losses of $188 and $175)						3,262						3,232
Contract assets						538						550
Inventories, net						626						622
Other current assets						342						382
Total Current Assets						7,844						8,261
Future income tax benefits						311						335
Fixed assets (net of accumulated depreciation of $1,144 and $1,156)						757						774
Operating lease right-of-use assets						542						526
Intangible assets, net						397						419
Goodwill						1,636						1,667
Other assets						308						297
Total Assets						$	11,795					$	12,279
Liabilities and Equity (Deficit)
Short-term borrowings						$	51					$	24
Accounts payable						1,507						1,556
Accrued liabilities						1,754						1,993
Contract liabilities						2,930						2,674
Total Current Liabilities						6,242						6,247
Long-term debt						6,694

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BUSINESS OVERVIEW

Business Summary

We are the world’s leading elevator and escalator manufacturing, installation and service company. Our Company is organized into two segments, New Equipment and Service. Through our New Equipment segment, we design, manufacture, sell and install a wide range of passenger and freight elevators, as well as escalators and moving walkways for residential and commercial buildings and infrastructure projects. Our New Equipment customers include real-estate and building developers and general contractors who develop and/or design buildings for residential, commercial, retail or mixed-use activity. We sell our New Equipment directly to customers, as well as through agents and distributors.

Through our Service segment, we perform maintenance and repair services for both our own products and those of other manufacturers and provide modernization services to upgrade elevators and escalators. Maintenance services include inspections to ensure code compliance, preventive maintenance offerings and other customized maintenance offerings tailored to meet customer needs, as well as repair services to address equipment and component wear and tear and breakdowns. Modernization services enhance equipment operation and improve building functionality. Modernization offerings can range from relatively simple upgrades of interior finishes and aesthetics to complex upgrades of larger components and sub-systems. Our typical Service customers include building owners, facility managers, housing associations and government agencies that operate buildings where elevators and escalators are installed.

We serve our customers through a global network of employees. These include sales personnel, field technicians with separate skills in performing installation and service, as well as engineers driving our continued product development and innovation. We function under a centralized operating model whereby a global strategy is set around New Equipment and Service because we seek to grow our maintenance portfolio, in part, through the conversion of new elevator and escalator installations into service contracts. Accordingly, we benefit from an integrated global strategy, which sets priorities and establishes accountability across the full product lifecycle.

The current status of significant factors affecting our business environment in 2022 is discussed below. For additional discussion, refer to the "Business Overview" section in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K.

Recent Developments

Ukraine and Russia

Based on the ongoing crisis in Ukraine and the related ongoing supply chain disruptions, we have reassessed our operations in Russia, which represented approximately 2% of our 2021 revenue and profit, comprising mostly of New Equipment. The Company is not taking new elevator or escalator orders in Russia and will make no new investments in the country for the time being. We will continue to fulfill our existing agreements and provide essential equipment and services in Russia, when possible, while remaining in compliance with applicable laws, including applicable sanctions and export controls.

The results of our operations, financial position and overall financial performance were not materially impacted by the events unfolding in Ukraine for the quarter ended March 31, 2022. We continue to assess the impact on our results of operations, financial position and overall performance as the situation develops and any broader implications it may have on the global economy.

Zardoya Otis Tender Offer

As previously disclosed, the Company announced the Tender Offer to acquire all of the issued and outstanding shares of Zardoya Otis not owned by Otis, at an offer price of €7.07 per share in cash after adjusting for dividends. The results of the Tender Offer were announced on April 7, 2022, with tenders of 45.49% of the shares outstanding accepted. The shares tendered to the Company were settled in cash on April 12, 2022 for approximately €1.5 billion from the Company's restricted cash held in escrow, resulting in the Company owning 95.51% of Zardoya Otis. The acquisition and settlement of the remaining issued and outstanding shares not owned by the Company for approximately €150 million (based on the adjusted tender price of €7.07

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per share) and the automatic delisting of Zardoya Otis shares are expected to occur in the second quarter of 2022.

See Note 1, "General", Note 7, "Borrowings and Lines of Credit" and Note 19, "Subsequent Events" to the Condensed Consolidated Financial Statements, for further details regarding this transaction and financing arrangements entered into in connection with the Tender Offer.

Impact of COVID-19 on our Company

The results of our operations and overall financial performance were impacted due to the COVID-19 pandemic during the quarters ended March 31, 2022 and 2021. COVID-19 has had and could continue to have an impact on our business in the future, including impacts to overall financial performance during the remainder of 2022, as a result of the following, among other things:

• Customer demand impacting our new equipment, maintenance and repair, and modernization businesses

• Cancellations or delays of customer orders

• Customer liquidity constraints and related credit reserves

• Supplier and raw material capacity constraints, delays and related costs

We currently do not expect any significant impact to our capital and financial resources from the COVID-19 pandemic, including to our overall liquidity position based on our available cash and cash equivalents and our access to credit facilities and the capital markets.

See the Liquidity and Financial Condition section in this Form 10-Q for further detail and Item 1A. Risk Factors in our Form 10-K for additional risks related to COVID-19.

CRITICAL ACCOUNTING ESTIMATES

Preparation of our Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The accounting policies that involve the most significant estimates, assumptions and management judgments used in preparation of the Condensed Consolidated Financial Statements, or are the most sensitive to change due to outside factors, are discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates" included in our Form 10-K. Except as disclosed in Note 18 to our Condensed Consolidated Financial Statements in this Form 10-Q, pertaining to adoption of new accounting pronouncements, there have been no material changes in these policies.

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RESULTS OF OPERATIONS

Net Sales

						Quarter Ended March 31,
(dollars in millions)						2022						2021
Net sales						$	3,414					$	3,408
Percentage change year-over-year						0.2		%

The factors contributing to the total percentage change year-over-year in total Net sales for the quarter ended March 31, 2022 are as follows:

						Quarter Ended March 31, 2022
Organic volume						3.1		%
Foreign currency translation						(3.0)		%
Acquisitions and divestitures, net						0.1		%
Total % change						0.2		%

The Organic volume increase of 3.1% for the quarter ended March 31, 2022 was driven by an increase in organic sales of 5.8% in Service, partially offset by a decrease of (0.5)% in New Equipment organic sales.

See "Segment Review" section for a discussion of Net sales by segment.

Cost of Products and Services Sold

						Quarter Ended March 31,
(dollars in millions)						2022						2021
Total cost of products and services sold						$	2,408					$	2,389
Percentage change year-over-year						0.8		%

The factors contributing to the percentage change year-over-year for the quarter ended March 31, 2022 in total cost of products and services sold are as follows:

						Quarter Ended March 31, 2022
Organic volume						3.8		%
Foreign currency translation						(3.1)		%
Other						0.1		%
Total % change						0.8		%

The organic increase in total cost of products and services sold for the quarter ended March 31, 2022 was primarily driven by the organic sales increases noted above and higher input costs including labor inflation and commodity headwinds, partially offset by productivity gains in both segments.

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Gross Margin

						Quarter Ended March 31,
(dollars in millions)						2022						2021
Gross margin						$	1,006					$	1,019
Gross margin percentage						29.5		%				29.9		%

Gross margin percentage decreased 40 basis points for the quarter ended March 31, 2022 when compared to the same period for 2021, as improvement in Service gross margin and overall segment mix were more than offset by a decrease in New Equipment gross margin.

See the "Segment Review" section for discussion of operating results by segment.

Research and Development

						Quarter Ended March 31,
(dollars in millions)						2022						2021
Research and development						$	37					$	35
Percentage of Net sales						1.1		%				1.0		%

Research and development was relatively flat for the quarter ended March 31, 2022, when compared to the same period for 2021.

Selling, General and Administrative

						Quarter Ended March 31,
(dollars in millions)						2022						2021
Selling, general and administrative						$	459					$	482
Percentage of Net sales						13.4		%				14.1		%

Selling, general and administrative expenses decreased $23 million for the quarter ended March 31, 2022, when compared to the same period in 2021, as cost containment actions, impact from foreign exchange and lower credit loss reserves were partially offset by labor inflation.

Selling, general and administrative expenses as a percentage of Net sales decreased 70 basis points for the quarter ended March 31, 2022, compared to the same period in 2021, as Net sales were relatively flat while expenses decreased.

Restructuring Cos****ts

						Quarter Ended March 31,
(dollars in millions)						2022						2021
Restructuring costs						$	14					$	15

We initiate restructuring actions to keep our cost structure competitive. Charges generally arise from severance related to workforce reductions, and to a lesser degree, facility exit and lease termination costs associated with the consolidation of office and manufacturing operations. We continue to closely monitor the economic environment and may undertake further restructuring actions to keep our cost structure aligned with the demands of the prevailing market conditions.

Total restructuring costs were $14 million for the quarter ended March 31, 2022 and included $13 million of costs related to 2022 actions, and $1 million of costs related to 2021 actions.

Most of the expected charges will require cash payments, which we have funded and expect to continue to fund with cash generated from operations. During the quarter ended March 31, 2022, we had cash outflows of approximately $17 million related to the restructuring actions and expect to make cash payments of $71 million to complete the actions announced, which will be comprised of the utilization of existing restructuring accruals and $36 million of additional restructuring expenses to be recognized.

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We generally expect to achieve annual recurring savings within the two-year period subsequent to initiating the actions, including $30 million for the 2022 actions and $38 million for the 2021 actions, of which approximately $9 million was realized for the 2022 and 2021 actions during the quarter ended March 31, 2022.

For additional discussion of restructuring, see Note 12 to the Condensed Consolidated Financial Statements.

Other Income (Expense), Net

						Quarter Ended March 31,
(dollars in millions)						2022						2021
Other income (expense), net						$	16					$	7

The change in Other income (expense), net of $9 million for the quarter ended March 31, 2022, compared to the same period in 2021, was primarily driven by favorable foreign currency mark-to-market adjustments.

Interest Expense (Income), Net

						Quarter Ended March 31,
(dollars in millions)						2022						2021
Interest expense (income), net						$	37					$	32

The increase in Interest expense (income), net of $5 million in the quarter ended March 31, 2022, compared to the same period in 2021, was driven by interest expense related to the Tender Offer for Zardoya Otis.

The average interest rate on our long-term debt for the quarters ended March 31, 2022 and 2021 was 2.0% and 2.4%, respectively.

For additional discussion of borrowings, see Note 7 to the Condensed Consolidated Financial Statements.

Income Taxes

						Quarter Ended March 31,
						2022						2021
Effective tax rate						27.8		%				25.9		%

The increase in the effective tax rate for the quarter ended March 31, 2022 is primarily due to the absence of a reduction in the deferred tax liability related to repatriation of foreign earnings recorded in the quarter ended March 31, 2021.

We anticipate some variability in the tax rate quarter to quarter from potential discrete items.

For additional discussion of income taxes and the effective income tax rate, see Note 11 to the Condensed Consolidated Financial Statements.

Noncontrolling Interest in Subsidiaries' Earnings and Net Income Attributable to Otis Worldwide Corporation

						Quarter Ended March 31,
(dollars in millions)						2022						2021
Noncontrolling interest in subsidiaries' earnings						$	42					$	44
Net income attributable to Otis Worldwide Corporation						$	311					$	308

Noncontrolling interest in subsidiaries' earnings and net income attributable to Otis Worldwide Corporation were relatively flat for the quarter ended March 31, 2022, compared to the same period in 2021.

Ownership interest in non-wholly owned subsidiaries has remained generally consistent year-over-year. For details on the results of the Tender Offer and purchases of shares of Zardoya Otis not previously owned by the Company made after March 31, 2022, see Note 19 to the Condensed Consolidated Financial Statements.

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Segment Review

Summary performance for our operating segments for the quarters ended March 31, 2022 and 2021 was as follows:

						Net Sales												Operating Profit												Operating Profit Margin
(dollars in millions)						2022						2021						2022						2021						2022						2021
New Equipment						$	1,422					$	1,458					$	93					$	104					6.5		%				7.1		%
Service						1,992						1,950						447						430						22.4		%				22.1		%
Total segment						3,414						3,408						540						534						15.8		%				15.7		%
General corporate expenses and other						—						—						(14)						(25)						—						—
Total						$	3,414					$	3,408					$	526					$	509					15.4		%				14.9		%

New Equipment

The New Equipment segment designs, manufactures, sells and installs a wide range of passenger and freight elevators, as well as escalators and moving walkways in residential and commercial buildings and infrastructure projects. Our New Equipment customers include real-estate and building developers and general contractors who develop and/or design buildings for residential, infrastructure, commercial, retail or mixed-use activity. We sell directly to customers as well as through agents and distributors. We also sell New Equipment to government agencies to support infrastructure projects, such as airports, railways or metros.

Summary performance for New Equipment for the quarters ended March 31, 2022 and 2021 was as follows:

						Quarter Ended March 31,
(dollars in millions)						2022						2021						Change						Change
Net sales						$	1,422					$	1,458					$	(36)					(2.5)		%
Cost of sales						1,190						1,187						3						0.3		%
						232						271						(39)						(14.4)		%
Operating expenses						139						167						(28)						(16.8)		%
Operating profit						$	93					$	104					$	(11)					(10.6)		%
Operating profit margin						6.5		%				7.1		%

Summary analysis of the Net sales change for New Equipment for the quarter ended March 31, 2022 compared with the quarter ended March 31, 2021 was as follows:

Components of Net sales change:						Quarter Ended March 31, 2022
Organic						(0.5)		%
Foreign currency translation						(1.9)		%
Acquisitions/Divestitures, net						(0.1)		%
Total % change						(2.5)		%

Quarter Ended March 31, 2022

Net sales

The organic sales decrease of (0.5)% was driven by declines in Americas and China, offset partially by mid single digit growth in EMEA and low single digit growth in Asia Pacific.

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Operating profit

New Equipment operating profit decreased $(11) million, partially driven by lower volume of $(5) million, with an operating margin decrease of 60 basis points. Lower bad debt expense and favorable field installation productivity was more than offset by commodity headwinds of $(38) million.

Service

The Service segment performs maintenance and repair services for both our products, and those of other manufacturers, and provides modernization services to upgrade elevators and escalators. Maintenance services include inspections to ensure code compliance, preventive maintenance offerings and other customized maintenance offerings tailored to meet customer needs, as well as repair services that address equipment and component wear and tear, and breakdowns. Modernization services enhance equipment operation and improve building functionality. Modernization offerings can range from relatively simple upgrades of interior finishes and aesthetics, to complex upgrades of larger components and sub-systems. Our typical Service customers include building owners, facility managers, housing associations and government agencies that operate buildings where elevators and escalators are installed.

Summary performance for Service for the quarters ended March 31, 2022 and 2021 was as follows:

						Quarter Ended March 31,
(dollars in millions)						2022						2021						Change						Change
Net sales						$	1,992					$	1,950					$	42					2.2		%
Cost of sales						1,218						1,202						16						1.3		%
						774						748						26						3.5		%
Operating expenses						327						318						9						2.8		%
Operating profit						$	447					$	430					$	17					4.0		%
Operating profit margin						22.4		%				22.1		%

Summary analysis of Service Net sales change for the quarter ended March 31, 2022 compared with the quarter ended March 31, 2021 was as follows:

Components of Net sales change:						Quarter Ended March 31, 2022
Organic						5.8		%
Foreign currency translation						(3.8)		%
Acquisitions/Divestitures, net						0.2		%
Total % change						2.2		%

Quarter Ended March 31, 2022

Net sales

The organic sales increase of 5.8% is due to organic sales increases in maintenance and repair of 5.6% and modernization of 6.9%.

Components of Net sales change:						Maintenance and Repair						Modernization
Organic						5.6		%				6.9		%
Foreign currency translation						(3.9)		%				(3.4)		%
Acquisitions/Divestitures, net						0.2		%				—		%
Total % change						1.9		%				3.5		%

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Operating profit

Service operating profit increased $17 million due to higher volume of $35 million, favorable pricing and productivity, partially offset by headwinds from foreign exchange of $(25) million, and labor inflation. Operating margin increased 30 basis points.

General Corporate Expenses and Other

						Quarter Ended March 31,
(dollars in millions)						2022						2021
General corporate expenses and other						$	(14)					$	(25)

General corporate expenses and other for the quarter ended March 31, 2022 decreased $(11) million primarily due to lower non-recurring Separation costs incurred when compared to the same quarter in 2021.

LIQUIDITY AND FINANCIAL CONDITION

(dollars in millions)									March 31, 2022						December 31, 2021
Cash and cash equivalents									$	1,235					$	1,565
Total debt									6,745						7,273
Net debt (total debt less cash and cash equivalents)									5,510						5,708
Total equity 1									(4,922)						(3,144)
Total capitalization (total debt plus total equity)									1,823						4,129
Net capitalization (total debt plus total equity less cash and cash equivalents)									588						2,564
Total debt to total capitalization 1									370		%				176		%
Net debt to net capitalization 1									937		%				223		%

1 Our total debt to total capitalization ratio and net debt to net capitalization ratio increased in the quarter ended March 31, 2022 due to the $1.5 billion reduction in equity upon the Tender Offer being approved by the Spanish regulator, and the resulting reclassification of our noncontrolling interest in Zardoya Otis to redeemable noncontrolling interest based on the value of the Tender Offer. For more information on the impact of the Zardoya Otis redeemable noncontrolling interest, see Note 1 to the Condensed Consolidated Financial Statements.

As of March 31, 2022, we had cash and cash equivalents of approximately $1.2 billion, of which approximately 98% was held by the Company's foreign subsidiaries. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost-effectiveness with which those funds can be accessed. On occasion, we are required to maintain cash deposits with certain banks with respect to contractual obligations related to acquisitions and divestitures or other legal obligations. As of March 31, 2022 and December 31, 2021, the amount of such restricted cash was approximately $1.8 billion and $1.9 billion, respectively, including cash held in escrow to fund the Tender Offer. For information on the results of the Tender Offer, see Note 19 to the Condensed Consolidated Financial Statements.

From time-to-time we may need to access the capital markets to obtain financing. We may incur indebtedness or issue equity as needed. Although we believe that the arrangements in place as of March 31, 2022 permit us to finance our operations on acceptable terms and conditions, our access to, and the availability of, financing on acceptable terms and conditions in the future could be impacted by many factors, including (1) our credit ratings or absence of a credit rating, (2) the liquidity of the overall capital markets and (3) the current state of the economy, including the impact of COVID-19. There can be no assurance that we will continue to have access to the capital markets on terms acceptable to us.

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There were no long-term debt issuances for the quarter ended March 31, 2022. The Company redeemed the $500 million floating notes originally due in 2023 during the quarter ended March 31, 2022. For additional discussion of borrowings, see Note 7 to the Condensed Consolidated Financial Statements.

The Company does not intend to reinvest certain undistributed earnings of our international subsidiaries that have been previously taxed in the U.S. For the remainder of the Company’s undistributed international earnings, unless tax effective to repatriate, we will continue to permanently reinvest these earnings.

We expect to fund our ongoing operating, investing and financing requirements mainly through cash flows from operations, available liquidity through cash on hand and available bank lines of credit and access to capital markets.

As a result of the increased debt incurred in 2021 to fund the Tender Offer, we temporarily suspended share repurchases as we focused on deleveraging. During the quarter ended March 31, 2022, we repaid certain debt and resumed our share repurchases. On March 9, 2022, our Board of Directors revoked any remaining share repurchase authority under the prior share repurchase program and approved a new share repurchase program for up to $1 billion of Common Stock, of which none had been utilized as of March 31, 2022. Under this program, shares may be purchased on the open market, in privately negotiated transactions, under accelerated share repurchase programs or under plans complying with rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended.

Cash Flow - Operating Activities

						Quarter Ended March 31,
(dollars in millions)						2022						2021
Net cash flows provided by operating activities						$	504					$	585

Cash generated from operating activities in the quarter ended March 31, 2022 was $81 million lower than the same period in 2021, primarily due to decreased cash inflows related to current assets and current liabilities activity of $150 million, as described below. These were partially offset by $41 million of higher non-cash adjustments from Net income and $26 million of higher Other operating activities, net, primarily due to long-term accruals and other activities in the quarter ended March 31, 2022.

Quarter Ended March 31, 2022 Changes in Working Capital

Cash inflows related to current assets and current liabilities operating activity for the quarter ended March 31, 2022 were $55 million. These cash inflows were primarily driven by:

• Contract assets, current and Contract liabilities, current, net change of $278 million, driven by the timing of billings on contracts compared to the progression on current contracts; partially offset by

• Accrued liabilities, which decreased $178 million, primarily due to the timing of payments of employee-related benefits, interest and income taxes; and

• Accounts receivable, net, which increased $51 million, primarily due to the timing of billings.

Quarter Ended March 31, 2021 Changes in Working Capital

Cash inflows related to current assets and current liabilities operating activity for the quarter ended March 31, 2021 were $205 million, including the following main drivers:

• Contract assets, current and Contract liabilities, current, net change of $328 million, driven by the timing of billings on contracts compared to the progression on current contracts;

• Other current assets, which decreased $61 million, due to prepaid income tax utilization and refunds received; and

• Accounts payable, which increased $29 million, primarily due to the timing of payments to suppliers; partially offset by

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• Accrued liabilities, which decreased $160 million, primarily due to the timing of payments of employee-related benefits, interest and income taxes, including the payment of foreign tax obligations pursuant to the TMA;

• Inventories, net, which increased $39 million, due to the impact of higher production inventory related to higher volume and timing of deliveries to construction sites; and

• Accounts receivable, net, which increased $14 million.

Cash Flow - Investing Activities

Cash flows used in investing activities primarily reflect capital expenditures, investments in businesses and securities, proceeds from the sale of fixed assets and settlement of derivative contracts.

Quarter Ended March 31, 2022 compared to Quarter Ended March 31, 2021

						Quarter Ended March 31,
(dollars in millions)						2022						2021						Change
Investing Activities:
Capital expenditures						$	(30)					$	(44)					$	14
Investments in businesses and intangible assets, net of cash acquired						(8)						(24)						16
Proceeds from the sale of (investments in) marketable securities						(7)						(18)						11
Receipts (payments) on settlements of derivative contracts						28						8						20
Other investing activities, net						—						28						(28)
Net cash flows used in investing activities						$	(17)					$	(50)					$	33

Cash flows used in investing activities in the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021 decreased $33 million, including the following drivers:

• $20 million higher net cash receipts from the settlement of derivative instruments, with net cash receipts of $28 million and $8 million during the quarter ended March 31, 2022 and 2021, respectively;

• $16 million lower investments in businesses and intangible assets in the quarter ended March 31, 2022; and

• $14 million lower capital expenditures and $11 million lower investments in marketable securities in the quarter ended March 31, 2022; partially offset by

• $28 million lower Other investing activities, net primarily due to property damage insurance proceeds received and proceeds from the sales of fixed assets during the quarter ended March 31, 2021.

As discussed in Note 13 to the Condensed Consolidated Financial Statements, we enter into derivative instruments for risk management purposes. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates and foreign exchange rates. These fluctuations can increase the costs of financing, investing and operating the business. We use derivative instruments, including forward contracts and options to manage certain foreign currency exposures.

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Cash Flow - Financing Activities

Financing activities primarily include increases or decreases in short-term borrowings, issuance or repayment of long-term debt, dividends paid to common shareholders, repurchases of Common Stock and dividends paid to noncontrolling interests.

						Quarter Ended March 31,
(dollars in millions)						2022						2021						Change
Financing Activities:
Increase (decrease) in short-term borrowings, net						$	26					$	(342)					$	368
Proceeds from issuance of long-term debt						—						199						(199)
Payment of debt issuance costs						—						(2)						2
Repayment of long-term debt						(500)						—						(500)
Dividends paid on Common Stock						(102)						(87)						(15)
Repurchases of Common Stock						(200)						(300)						100
Dividends paid to noncontrolling interest						(33)						(32)						(1)
Other financing activities, net						(14)						(10)						(4)
Net cash flows provided by (used in) financing activities						$	(823)					$	(574)					$	(249)

Net cash used in financing activities increased $249 million in the quarter ended March 31, 2022 compared to the same period in 2021 primarily due to higher net repayments on borrowings of $474 million during the quarter ended March 31, 2022 compared to $145 million during the same period in 2021, which were made with cash flow from operations and existing cash balances. Net repayments on borrowings are comprised of the following activity:

• Repayments of long-term debt of $500 million, partially offset by net short-term borrowings of $26 million, during the quarter ended March 31, 2022; and

• Net repayments of short-term borrowings of $342 million, partially offset by net proceeds from the issuance of long-term debt of $197 million, during the quarter ended March 31, 2021.

These higher net repayments on borrowings were partially offset by lower repurchases of Common Stock in the quarter ended March 31, 2022 compared to the same period in 2021.

For additional discussion of borrowings activity, see Note 7 to the Condensed Consolidated Financial Statements.

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Guaranteed Securities: Summarized Financial Information

The following information is provided in compliance with Rule 13-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended, with respect to the 2023 Euro Notes, the 2026 Euro Notes and the 2031 Euro Notes (together the "Euro Notes"), in each case issued by Highland Holdings S.à r.l. (“Highland”), a private limited liability company (société à responsabilité limitée) incorporated and existing under the laws of the Grand Duchy of Luxembourg ("Luxembourg"). The Euro Notes are fully and unconditionally guaranteed by Otis Worldwide Corporation ("OWC") on an unsecured, unsubordinated basis. Refer to "Note 10: Borrowings and Lines of Credit" in Item 8 in our 2021 Form 10-K, for additional information.

Highland is a wholly-owned, indirect consolidated subsidiary of OWC. OWC is incorporated under the laws of Delaware. As a company incorporated and existing under the laws of Luxembourg, and with its registered office in Luxembourg, Highland is subject to Luxembourg insolvency and bankruptcy laws in the event any insolvency proceedings are initiated against it. Luxembourg bankruptcy law is significantly different from, and may be less favorable to creditors than, the bankruptcy law in effect in the United States and may make it more difficult for creditors to recover the amount they could expect to recover in liquidation under U.S. insolvency and bankruptcy rules.

The Euro Notes are not guaranteed by any of OWC's or Highland's subsidiaries (all OWC subsidiaries other than Highland are referred to herein as "non-guarantor subsidiaries"). Holders of the Euro Notes will have a direct claim only against Highland, as issuer, and OWC, as guarantor.

The following tables set forth the summarized financial information as of and for the quarter ended March 31, 2022 and as of December 31, 2021 of each of OWC and Highland on a standalone basis, which does not include the consolidated impact of the assets, liabilities, and financial results of their subsidiaries except as noted on the tables below, nor does it include any impact of intercompany eliminations as there were no intercompany transactions between OWC and Highland. This summarized financial information is not intended to present the financial position or results of operations of OWC or Highland in accordance with U.S. GAAP.

(dollars in millions)						Quarter Ended March 31, 2022
OWC Statement of Operations - Standalone and Unconsolidated
Revenue						$	—
Cost of revenue						—
Operating expenses						—
Income from consolidated subsidiaries						60
Income (loss) from operations excluding income from consolidated subsidiaries						2
Net income (loss) excluding income from consolidated subsidiaries						(27)

(dollars in millions)						March 31, 2022						December 31, 2021
OWC Balance Sheet - Standalone and Unconsolidated
Current assets (excluding intercompany receivables from non-guarantor subsidiaries)						$	72					$	197
Current assets (intercompany receivables from non-guarantor subsidiaries)						—						—
Noncurrent assets, investments in consolidated subsidiaries						1,271						1,271
Noncurrent assets (excluding investments in consolidated subsidiaries)						48						48
Current liabilities (intercompany payables to non-guarantor subsidiaries)						2,131						1,516
Current liabilities (excluding intercompany payables to non-guarantor subsidiaries)						82						73
Noncurrent liabilities						5,224						5,725

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(dollars in millions)						Quarter Ended March 31, 2022
Highland Statement of Operations - Standalone and Unconsolidated
Revenue						$	—
Cost of revenue						—
Operating expenses						—
Income from consolidated subsidiaries						738
Income (loss) from operations excluding income from consolidated subsidiaries						—
Net income (loss) excluding income from consolidated subsidiaries						(2)

(dollars in millions)						March 31, 2022						December 31, 2021
Highland Balance Sheet - Standalone and Unconsolidated
Current assets (excluding intercompany receivables from non-guarantor subsidiaries)						$	—					$	—
Current assets (intercompany receivables from non-guarantor subsidiaries)						1						2
Noncurrent assets (investments in consolidated subsidiaries)						12,524						12,524
Noncurrent assets (intercompany receivables from non-guarantor subsidiaries)						650						666
Noncurrent assets (excluding investments in consolidated subsidiaries)						—						—
Current liabilities (intercompany payables to non-guarantor subsidiaries)						—						171
Current liabilities (excluding intercompany payables to non-guarantor subsidiaries)						4						2
Noncurrent liabilities						1,750						1,795

Off-Balance Sheet Arrangements and Contractual Obligations

Item 5 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Form 10-K, discloses our off-balance sheet arrangements and contractual obligations. As of March 31, 2022, there have been no material changes to these off-balance sheet arrangements and contractual obligations, outside the ordinary course of business except for those disclosed in the "Note 7, Borrowings and Lines of Credit" within Item 1 of this Form 10-Q.